SBI Small Cap Fund: The best and most consistent small cap fund over the last 5 years

In the last one year, when Nifty Small Cap (SML 100) Index fell 13% and small cap mutual funds as a category gave -4% return, SBI Small Cap Fund protected investor’s capital and delivered positive returns. The relatively good performance by SBI Small Cap Fund in very difficult market conditions (last one year) and its outstanding long term performance, 21% CAGR over the last 5 years, make the scheme, in our opinion, one of the best small cap mutual funds.

If we look at the performance of small cap funds over last 3 and 5 years (see our research tool, Top Performing Mutual Funds (Trailing returns) - Equity: Small Cap), you will see that SBI Small Cap Fund tops the list of best performing small cap mutual funds. Regular advisorkhoj.com readers know that we give a lot of importance to consistency in a fund’s long term performance track record. Our Top Consistent Mutual Fund Performers identifies most consistent performers based on different rolling returns performance parameters relative to their peers. It is not surprising that SBI Small Cap Fund tops the list of most consistent small cap funds also.

Scheme Overview

The scheme was launched almost 10 years back (September 2009) and has around Rs 2,200 Crores of AUM. The expense ratio of the scheme is 2.38%. The scheme is managed by industry veteran R.Srinivasan for the last 6 years. The scheme benchmark is S&P BSE Small Cap TRI. As per SEBI mandate, small cap funds must invest at least 65% of their assets in small cap stocks. SEBI classifies stocks which are below the top 250 stocks by market capitalization as small cap stocks. The chart below shows the NAV movement of SBI Small Cap Fund over the last 5 years.

Source: Advisorkhoj Research

The chart below shows that SBI Small Cap Fund was able to outperform both its benchmark, S&P BSE Small Cap TRI and its peers (small cap funds category average) in different market conditions, e.g. bull market, range-bound market, limited correction and bear market.

Source: Advisorkhoj Research

The chart below shows the returns of SBI Small Cap Fund over different trailing time periods (ending 26^th June 2019). Again the scheme has outperformed the benchmark and the category average.

Source: Advisorkhoj Research

Rolling returns

The chart below shows the 3 year rolling returns of SBI Small Cap Fund versus its benchmark index over the last 5 years. You can see that the scheme has consistently (100% of the times) outperformed the benchmark index, across different periods and market conditions, and delivered alphas to investors. The scheme delivered more than 12% CAGR 3-year returns 100% of the times in the last 5 years (minimum 3 year return was around 13%). The scheme delivered more than 20% CAGR 3–year returns more than 52% of the times.

Source: Advisorkhoj Rolling Returns versus benchmark calculator

Let us now compare the rolling returns of SBI Small Cap Fund versus the small cap funds category average. The chart below shows the 3 year rolling returns of SBI Small Cap Fund versus the average 3 year rolling returns of the small cap funds category. The scheme outperformed the category average in terms of 3 year returns, 100% of the times in the last 5 years.

Source: Advisorkhoj Rolling Returns versus category calculator

Portfolio Construction

The scheme follows a blend of growth and value style of investing. The fund manager follows a bottom-up approach to stock-picking. He follows a blend of growth and value style of investing. While the scheme primarily invests in small cap stocks (as per SEBI mandate), the rest of the scheme portfolio comprises of mainly midcap stocks; large cap stocks account for a small percentage of the scheme portfolio. The chart below shows the top stocks and sectors of the SBI Small Cap Fund portfolio. You can see that the fund manager prefers stocks from cyclical industry sectors which will benefit from revival of the domestic consumption and capex growth.

Source: Advisorkhoj Research

Peer Comparison

The table below shows the performance comparison of SBI Small Cap Fund versus some of its peers (as on 26^th June 2019). All the 4 schemes shown the table below are among the Top 10 schemes in terms of last 3 year returns. Please note we are comparing performance of regular plans (growth option). You can see that SBI Small Cap Fund outperformed most of its peers in terms of short term (1 year) and outperformed all its peers in terms of long term (3 year and 5 year) returns

Source: Advisorkhoj Research

Wealth creation in last 5 years – Lump Sum and SIP

The chart below shows the growth of Rs 1 lakh lump sum investment in SBI Small Cap Fund (Growth Option, Regular Plan) over the last 5 years. Your Rs 1 lakh investment would have grown to Rs 2.65 lakhs, capital appreciation of Rs 1.65 lakhs in 5 years.

Source: Advisorkhoj Research

The chart below shows the returns of Rs 5,000 monthly SIP in SBI Small Cap Fund (Growth Option, Regular Plan) over the last 5 years. With a cumulative investment of Rs 3 lakhs you could have a created a corpus of more than Rs 4.2 lakhs by investing through SIP. The annualized SIP return (XIRR) in the last 5 years was 13.4%.

Source: Advisorkhoj Research

Conclusion

Small cap stocks were trading at a considerable valuation premium to large cap stocks in 2017, but after the correction of 2018 small cap stocks are now trading at discount to large caps. The BSE Small Cap Index P/E ratio is FY 2018 was a staggering 86 when Sensex P/E ratio was only around 24. But now Sensex P/E ratio is around 28 while BSE Small Cap Index P/E ratio is less than 25.

Investment experts think that these are attractive levels to invest in small cap funds. Several fund managers that we have interviewed told us that they are seeing good investment opportunities in the small cap space with considerable upside in the long term. In Advisorkhoj, we think that SIP is the ideal mode for investing in small cap funds, but the deep correction in small cap stocks have created opportunity to tactically invest in lump sum also. If you have lump sum funds but are worried about volatility, you can invest in SBI Small Cap Fund through STP from SBI Liquid Fund over the next 3 – 6 months. Investors should have high risk appetite and at least 5 year investment horizon for this scheme. You should consult with your financial advisor if SBI Small Cap Fund is suitable for your investment needs.